King Beaten by Pound Gains as Foreigners Buy Homes: Currencies

A worker polishes a lamp at the Grosvenor Crescent residential housing redevelopment project, a joint venture between Royal Bank of Scotland Group Plc (RBS) and Grosvenor Group Ltd., in London, U.K.. Photographer: Simon Dawson/Bloomberg

Nov. 14 (Bloomberg) -- At a time when Bank of England
Governor Mervyn King could use a weaker pound to boost the
economy, investors from Japan to Norway are propping up sterling
by purchasing more U.K. real estate than British citizens and
the most stocks and bonds in over three years.

Foreigners are spending more on U.K. properties worth over
6 million pounds ($9.5 million) than residents are for the first
time in a decade, according to Real Capital Analytics Inc. The
most recent data on portfolio investments, which include
purchases and sales of equities and debt, showed a 37.6 billion-pound net inflow in the second quarter, the biggest since 2009.

While King and Prime Minister David Cameron are leading an
economy poised to contract on an annual basis for the first time
in three years, foreign-exchange strategists see no weakness for
sterling. That’s because international investors are flocking to
the U.K. as a refuge from Europe’s debt turmoil, pushing the
pound higher this year against the dollar, euro and yen.

“With the U.K. being in Europe but outside of the euro
zone, it offers this safe haven to some extent when you look at
property prices and markets,” Thomas Kressin, the Munich-based
head of European foreign-exchange at Pacific Investment
Management Co., which oversees $1.9 trillion, said by phone on
Nov. 8. “That is one aspect that has been helping sterling.”

Increased Takeovers

Buyers from abroad already increased acquisitions of
British companies by 38 percent this year compared with 2011, to
the most since 2008. GDF Suez SA, Europe’s biggest utility by
market value, paid 8.4 billion euros ($10.7 billion) for the 30
percent of International Power Plc it didn’t own in a deal
completed in July. Hong Kong Exchanges & Clearing Ltd. is
purchasing the London Metal Exchange for $2.2 billion, subject
to approval from the U.K.’s regulators.

Overseas investors are adding to holdings of gilts for a
10th-straight year, according to monthly data on the Bank of
England’s website.

Residential real estate is also hot. International
investors accounted for 41 percent of London houses bought for
at least 1 million pounds in September, pushing the cost of
luxury homes to a record, according to property consultant firm
Knight Frank LLP.

The pound was little changed at $1.5856 as of 2:15 p.m. in
New York, having erased an intraday advance after the Bank of
England cut its U.K. growth outlook and said the currency’s
strength is undermining companies’ competitiveness. It’s still
up 2.1 percent this year versus the greenback, and has climbed
4.2 percent from the 2012 low of $1.5235 set on Jan. 13.
Sterling traded at 80.44 pence per euro, up 3.7 percent this
year, and 127.48 yen.

Bearish Reversal

“The U.K. will avoid the worst of the euro-zone crisis and
the pound offers relative safety compared with the euro,” Nick
Bennenbroek, the head of currency strategy in New York at Wells
Fargo & Co., said in a phone interview on Nov. 12. “The pound
has turned more resilient than it was earlier this year.”

While analysts say the U.K. and euro-region economies will
shrink in 2012, they see Britain recovering at a faster pace in
subsequent years. Gross domestic product will expand 1.1 percent
next year and 1.8 percent in 2014, according to the median of
analyst estimates compiled by Bloomberg. The euro area will grow
0.25 percent and 1.2 percent.

Hedge funds and other large speculators are betting
sterling will extend its gains versus the dollar, a reversal
from last year. The difference in the number of wagers on an
advance in the pound compared with those on a drop stood at
19,279 contracts on Nov. 6, according to figures from the
Commodity Futures Trading Commission in Washington. That
compares with 47,092 wagers on a decline on Nov. 1, 2011.

Printing Money

Sterling strengthened even as King printed currency to buy
375 billion pounds of bonds, pushing down interest rates to spur
growth. The policy helped cut Britain’s yields to record lows
even as the fallout from Greece’s three-year-old financial
crisis led Italian and Spanish borrowing costs to euro-era
record highs.

Overseas investors spent 13.5 billion pounds on U.K.
property through Oct. 12, compared with 9.3 billion pounds of
domestic purchases, according to the data based on high-value
deals compiled by Real Capital Analytics, a London-based real-estate research firm. If the trend continues, this will be the
first year since at least 2001 when investments from abroad
outpaced U.K. spending on the properties.

Full Monty

Norway’s $650 billion sovereign wealth fund spent 348
million pounds last month on a 50 percent stake in the
Meadowhall Shopping Centre in Sheffield, northern England, where
the Academy Award-nominated film “The Full Monty” was set. Two
years ago, it also paid 448 million pounds for a 25 percent
stake in London’s Regent Street.

“The U.K. has a large, well-established and liquid
property market and will be important to the fund’s long-term
real-estate investment,” Bunny Nooryani, the Oslo-based fund’s
spokeswoman, said on Nov. 6 in an e-mailed response to
questions.

The pension fund of Japanese chemical maker DIC Corp. said
last month it’s seeking investments in British property as
Japan’s real-estate market needs time to recover from a slump.

U.K. properties returned 7.6 percent annually in the last
10 years, according to an Investment Property Databank index.
That compared with 3.2 percent in Germany and 7.9 percent in the
U.S.

Hyde Park

At One Hyde Park, the U.K.’s most expensive residency
complex, an investor from Kazakhstan bought a four-bedroom
apartment for more than 25 million pounds last month, according
to company data. People from 25 countries own apartments there.

“I recently met one potential client who is a professor in
Kuwait and I tried to extol the virtue of the U.K. property
market,” Giles Beswick, a director at VitaStudent.com, a
developer of accommodations for wealthy students, said by phone
on Oct. 29. “He said ‘Look, you don’t have to convince me at
all.’”

One of Vita’s projects in Liverpool, which provides hotel-standard rooms for students, was sold out in three months,
Beswick said.

“If you look for medium- to long-term investment, bricks
and mortar in the U.K. have a track record as being a safe
investment,” he said “Sixty percent of our projects were
bought by foreigners, mostly from the Middle East.”

Olympic Boost

While Britain’s economy emerged from a recession in the
third quarter with the strongest growth in five years, Bank of
England Deputy Governor Charles Bean cautioned the revival was
“boosted by one-off factors,” including the Olympic Games.

Indexes of manufacturing and services dropped in October,
and the economy will shrink 0.3 percent this year, the first
contraction since 2009, according to the median estimate of 43
economists surveyed by Bloomberg News. Britain’s current-account
deficit widened to a record 20.8 billion pounds in the second
quarter, from 15.4 billion pounds in the previous three months,
as companies earned less on foreign operations.

The Bank of England said in a quarterly report today it
sees a risk of “persistent low growth.” The pound’s
appreciation is “not a welcome development,” King said in a
subsequent press conference.

“There’s ground for the pound to weaken over the coming
months,” said Daragh Maher, a currency strategist at HSBC
Holdings Plc. “Growth in general is still weak. The market is
being quite patient, but the time will come when it will get a
bit nervous about the budget outlook again.”

Public finances have weakened amid depressed tax revenues
and increased welfare spending. The budget deficit in the first
six months of the fiscal year started in April widened more than
4 percent to 65.1 billion pounds from 62.4 billion pounds a year
earlier.

Quantitative Easing

While the Bank of England said on Nov. 8 it doesn’t plan to
buy more bonds, concluding a third round of so-called
quantitative easing, further stimulus that would debase sterling
can’t be ruled out, said Maher. He estimates sterling will
weaken to 86 pence per euro by the second quarter, compared with
the 79 pence median estimate of foreign-exchange analysts
compiled by Bloomberg.

HSBC is in the minority, with the probability of the pound
reaching its 86 pence per euro target at 8 percent, implied
volatility from options trading shows.

Wells Fargo, the most-accurate currency forecaster in the
six quarters ended Sept. 28, based on data compiled by
Bloomberg, predicts the pound will strengthen to 78.5 pence per
euro in the next six months and to 77.25 pence in 12 months,
Bennenbroek said.

Currency strategists have increased their median year-end
sterling forecast to $1.60, from this year’s low of $1.54 in
July. The pound has gained 1.2 percent this year, according to
Bloomberg Correlation Weighted Indexes, which track 10
developed-market currencies.

Foreign Buyers

Acquisitions of U.K. companies by foreign investors
increased to about $134 billion so far in 2012 from $97 billion
in the whole of last year, according to data compiled by
Bloomberg. U.K. companies spent about $72 billion on deals
abroad, down 33 percent from $107 billion in 2011, the data
show.

Foreign investors bought 16.8 billion pounds more U.K.
government bonds than they sold in the three months through
September, acquiring a net 9.8 billion pounds of the securities
this year, according to Bank of England data.

“Sterling has been playing a safe-haven status within the
context of Europe, while U.K. fundamentals have turned less
negative,” Vassili Serebriakov, a strategist at BNP Paribas SA
in New York, said in a phone interview on Nov. 12. BNP Paribas
sees the pound at 74 pence per euro at end of 2013. “We are not
looking for an extreme euro-zone scenario, but it’s clear the
crisis is not going to be resolved overnight. Sterling is one of
our preferred currencies and we see it outperforming the euro.”